WASHINGTON — Canadian National and Kansas City Southern today asked federal regulators to approve a voting trust that is the initial step in their plans to merge into the first railroad linking Canada, the U.S., and Mexico.
To address competition concerns in the one area where the railroads’ systems overlap, CN said it will sell the 70-mile KCS line that links New Orleans with Baton Rouge, La. The KCS New Orleans Subdivision closely parallels CN’s own former Illinois Central line, and the railroads jointly serve nine customers on the route.
CN CEO JJ Ruest says he’s confident the filing will demonstrate that a CN-KCS combination is an end-to-end merger that will boost rail competition, take trucks off the highway with faster single-line service, and benefit customers in all three nations. “We are very excited about the future and our combined companies,” Ruest told an investor conference this morning.
The KCS board last week backed out of its merger deal with Canadian Pacific and unanimously accepted CN’s offer because it was in the best interest of the company’s shareholders, customers, employees, and the communities it serves, KCS CEO Pat Ottensmeyer says. “We are totally focused and excited to join forces at this point with Canadian National,” he told the investor webcast in a joint appearance with Ruest.
“We think this combination is truly an exceptional opportunity,” Ottensmeyer adds.
The Surface Transportation Board last week rejected CN’s initial request to put KCS into a voting trust on procedural grounds because the railroads had not yet filed their merger agreement. But the board also said it would take a more cautious approach to a voting trust involving a CN-KCS merger and indicated that it had concerns over the $19 billion in debt CN would take on to finance the $33.6 billion deal.
CN and KCS filed their merger agreement on Friday. The voting trust does two things. First, it allows KCS shareholders to receive $325 per share in a combination of cash and CN stock. Second, it allows KCS to operate independently while the merger is under regulatory review.
Because the trust is identical to the one the board approved for a CP-KCS merger, CN officials say their trust request should ultimately receive board approval by the end of June.
In their voting trust filing today, CN and KCS sought to show that the merger is in the public interest and that CN has the financial strength to acquire KCS – and that it would not be harmed if it were forced to sell KCS in the event regulators reject the merger.
The railways argued that their deal is in the public interest because it would create new competition for BNSF Railway and Union Pacific between Texas and Chicago, as well as capture freight off highways thanks to single-line service linking Mexico, the U.S., and Canada.
CN also said it would not be harmed if it were forced to sell KCS if the merger were not approved. “Divestiture poses no significant financial risk to CN, as it could sell KCS and easily cover the entire amount of its new debt,” the railroads wrote. “Indeed, CP awaits in the wings with a keen interest.”
CP has said it will continue to pursue its KCS merger application with the STB and would revive its $29 billion KCS merger deal if a CN-KCS combination unravels.
CP CEO Keith Creel today questioned whether a CN-KCS combination was in the public interest because of broad competitive overlap between the parallel CN former Illinois Central and the KCS main line south of Kansas City, Mo.
A combined CN-KCS system would funnel investment away from the KCS Kansas City-Shreveport, La., main line and into the former Illinois Central, Creel argues.
CN has pledged to keep all existing gateways open, including the CP-KCS interchange in Kansas City, the only place where their systems touch. Ruest says CN wants to see more traffic flow through all of KCS’s existing interchanges.
CN and KCS say their merger, which has the backing of 1,100 shippers, officials, and ports, would generate $1 billion in synergies, including $750 million of new revenue from traffic growth.
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